Maximum weighted likelihood estimator for robust heavy-tail modelling of finite mixture models

Tsz Chai Fung

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arXiv · 2108.01356

Maximum weighted likelihood estimator for robust heavy-tail modelling of finite mixture models

Tsz Chai Fung

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Abstract

In this article, we present the maximum weighted likelihood estimator (MWLE) for robust estimations of heavy-tail finite mixture models (FMM). This is motivated by the complex distributional phenomena of insurance claim severity data, where flexible density estimation tools such as FMM are needed but MLE often produces unstable tail estimates under FMM. Under some regularity conditions, MWLE is proved to be consistent and asymptotically normal. We further prove that the tail index obtained by MWLE is consistent even if the model is misspecified, justifying the robustness of MWLE in estimating the tail part of FMM. With a probabilistic interpretation for MWLE, Generalized Expectation-Maximization (GEM) algorithm is still applicable for efficient parameter estimations. We therefore present and compare two distinctive constructions of complete data to implement the GEM algorithm. By exemplifying our approach on two simulation studies and a real motor insurance data set, we show that comparing to MLE, MWLE produces more appropriate estimations on the tail part of FMM, without much sacrificing the flexibility of FMM in capturing the body part.

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Tsz Chai Fung. 2021-08-03. Maximum weighted likelihood estimator for robust heavy-tail modelling of finite mixture models. https://arxiv.org/abs/2108.01356

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